Are revenues derived from sound recordings securitisable? If not, why not? Should they be made so, in order for record companies to offer attractive investment opportunities for major investment funds?

Sound recordings have always seemed to suffer being the poor sister of songs and publishing in relation to asset security and future earning potential.

Many financial analysts have warned that “until revenue from sound recordings is securitisable in the same way as that from songs there will be no reason for anyone to invest in either making sound recordings or administering and marketing catalogues of them”
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Will this point the way towards reasonable and non-discriminatory wholesale licensing to new distribution partners such as ISPs instead of the Stalinist command economy approach that pertains today, along with its massive and disruptive costs of enforcement?

Securitisation is one way in which the asset owner can raise finance. It can be defined as “a device of structuring financing where an entity seeks to pool together its interests in identifiable cashflow over time, transfer the same to investors either with or without the support of further collateral, and thereby achieve the purpose of financing”.

Therefore, a fundamental requirement is that there be an asset or asset pool that generates a cashflow, and ideally a regular and predictable cashflow. It is this cashflow that forms the basis of the securitisation loan or the asset-backed security (ABS).

Underlying assets typical in ABS transactions are those, which generate stable and predictable income streams (eg, real estate, mortgage portfolios and aircraft leases). This clearly, excludes sound recordings. However, in recent years the ABS asset class has widened and investors have shown increasing interest in intellectual property as an asset class for this purpose.

So what is blocking securitisation of sound recordings?

Although IP assets are capable of generating large cashflows, using them as the basis for ABS structures is not straightforward. Key areas presenting direct problems to securitising sound recordings include the following:

• Valuation – the intangible nature of IP assets makes accurate and reliable valuation difficult. In particular, valuation linked to the cashflow generation potential of the asset is notoriously difficult; especially as events beyond the control of the originator may affect the level of cashflow.

• Jurisdictional differences – IP assets are predominantly national rights, subject to the jurisdiction of the territory to which they relate. There is no uniform worldwide patent, copyright or trademark law.

• The global slump in recorded music sales and the prevalence of peer-to-peer music-sharing sites on the Internet have put music copyright-backed securitisations in danger.

Is it this, which has perhaps prevented the labels from fully embracing the digital realm? Or is it instead that of possessing the securitisable assets of songs, record labels have made large investments in sound recording assets, yet they do not carry the same protection available to that asset and the investment in it.

Obviously, labels have been fighting to keep the value of those assets and a key method in there or the IFPI’s view, has been to start a war with file sharers. I’m sure companies in other industries suffering similar circumstances would follow a rather similar litigious route. Today most major labels are actively participating in new and different business models to ensure their content is available to consumers how and when they want to digest it.

But is it viable and indeed will the market accept sound recordings as securitisable assets like they currently do so with songs and music publishing? With file sharing and piracy of recorded music at such high levels it is unlikely that investors will find sound recordings as a viable securitisable asset.

Obviously, securitising sound recordings present unique challenges as compared to securitisations based on more established asset classes. Yet it could be argued, that the recent crackdown on peer to peer sites and the increasing popularity of legal music download sites such as iTunes and eMusic, along with the boom in mobile music content consumption seem likely to re-establish the attractiveness of this form of securitisation in the near future.

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